Month: August 2012

Last week, in the ever-evolving “employee versus independent contractor” battle, Judge Anthony Battaglia of the U.S. District Court for the Southern California in a decision added additional fuel in a decision in the broker-dealer/registered representative arena. Battaglia upheld Waddell & Reed’s classification of its reps as independent contractors, ruling against two brokers who claimed that they should have been treated as employees. Earlier, in 2010, the court refused to dismiss a putative class action against Waddell & Reed that alleged that the financial services giant misclassified its financial advisors or registered representatives as independent contractors rather than employees. In the current decision, the court granted Waddell’s motion for two summary judgments, but allowed the two former rep/plaintiffs to add a third broker to their suit.

Clearly, the Taylor v. Waddell & Reed ruling is, by no means, the last word on the issue. And, don’t expect the SEC and FINRA to weigh in any time soon. Nor should broker-dealers expect that simply enhancing a boiler-plate employment contract provision will necessarily do the trick.

Further, the classification of workers as independent contractors will continue to draw scrutiny from the Department of Labor, the Internal Revenue Service, state agencies and legislatures, and the plaintiffs’ bar. For broker-dealers this may mean, at a minimum, three considerations. First, broker-dealers will need to review how they utilize their registered representatives’ services. Second, they’ll need to have a clear understanding of the laws they’re relying on for the independent rep classification. Finally, they’ll need to consider the legal exposure and what proactive steps may be necessary (i.e. potential liability) if they’ve been misclassifying a particular rep.

Seeking to ensure that broker-dealers identify conflicts and place their customers’ interests above there own, FINRA sent to its member firms, in July, another “Targeted Examination Letter” announcing that it would be conducting targeted examinations (or sweeps) of member practices to review how they identified and managed conflicts of interest. The letter sent to a number of firms seeks a response by September 14, 2012, followed by a potential three hour meeting to discuss information reported.

What this exercise means for member firms in the near term and in the future is that any new rules FINRA enacts are likely to have a significant effect on broker-dealers with retail clients, particularly in the areas of best execution and customer order handling. Firms will need to address whether conflicts exist for topics related to best execution as “internalization” (i.e. agency cross trades orders), “preferencing (directing to one market maker over another), affiliated brokerage (i.e. directing fund brokerage commissions to brokers that sold large number of fund shares), and the priority of trade execution (i.e. trading ahead of customers, block trading, front running and proprietary trading issues) to name a few.

FINRA makes explicit that it will not be using information gathered from the sweeps as a tool for potential enforcement actions, but instead is using responses to better understand whether firms are taking reasonable steps to properly identify, manage and mitigate conflicts that may impact clients and the industry. The letter also states that FINRA intends to develop potential guidance for the industry from the information it learns. From a fiduciary perspective, and if broker-dealers haven’t been doing so, they need to start thinking about creating formal risk assessment programs that address conflicts concerns.

The Board of Directors of Certified Financial Planner Board of Standards, Inc. (CFP Board) has announced, effective August 27, 2012, the adoption and implementation of new Sanction Guidelines.

Typically, the CFP Board’s enforcement process involves them investigating incidents of alleged unethical behavior using procedures established by the CFP Board’s Disciplinary Rules and Procedures. When violations are found, the CFP Board can impose discipline ranging from a private letter of censure or public admonition to suspension or revocation of the right to use the CFP® mark.

In the past, the differences in punishment meted out for those violating CFP’s rules haven’t always represented a model of consistency. Presumably, the new guidelines will assist the Disciplinary and Ethics Commission (DEC), the group that conducts disciplinary hearings under the CFP Board’s rules, in doing just that. Similar to FINRA’s approach, the CFP Board’s sanction guidelines includes a chart featuring recommended sanctions for violations that cover everything from bankruptcy, to borrowing money from a client to unauthorized use of the CFP® mark. The chart also includes a column or category entitled “Policy Notes” or factors that the DEC, and if appealed, may also be used by the Appeals Committee of the Board of Directors which considers appeals of DEC decisions.

This blog identifies and discusses new and developing regulatory issues that impact investment advisers, broker-dealers, corporations and individuals who either work in the securities industry or who are impacted by its regulations.